25 Jul Beginner’s Guide to IPOs (Part 1)

New startups in the technology game are always talking about IPOs both online and in the mainstream media, but how many people actually know what they are? Let’s start with the basics. The term IPO stands for “initial public offering,” which is the first sale of stock by a company to the general public. If a given company has never issued equity to the public, this first issuance is known as an IPO.

Generally speaking, a company can be either public or private, but not both at the same time. A privately-held company typically has a small amount of shareholders that do not disclose many details about their company. In most cases, it isn’t possible to buy shares in a private company. Even if you tried to convince the owners to let you invest in their company, they are not obligated to sell.

A publicly-held company, on the other hand, has sold at least some percentage of itself publicly and has traded on a stock exchange, which basically functions as a marketplace where commodities, derivatives, securities, and other financial instruments are traded. It is this public aspect of a company that puts the letter “P” in “IPO” and why an IPO is sometimes referred to as “going public.”

Publicly-held companies can have thousands of shareholders and are subject to strict requirements imposed by government entities. In the United States, an example of such regulating body is known as the Securities Exchange Commission, or “SEC” for short. Each one is required to have a board of directors that reports financial information to the SEC on a quarterly basis.

Okay, now you have the basics. But, other than allowing total strangers to own and trade the same company, what are the real reasons why a company would want to go public? There are several reasons. Going public can raise a serious amount of cash for a company and allows them to get better rates when issuing debt due to the increased scrutiny imposed by regulating authorities. A public company can issue more stock as long as the market demand calls for it, thus making it much easy to perform mergers and acquisitions. Public companies offer liquidity as well, which makes it easier for a one who invests in the company to get his or her money out of the investment. A company with a high level of trading activity is said to be more liquid than one with low trading activity.

In the next part we’ll discuss some more reasons why it is good for a private company to IPO.